Funding Liquidity without Banks: Evidence from a Shock to the Cost of Very Short-Term Debt

In 2011, Colombia instituted a tax on repayment of bank loans, thereby increasing the cost of short-term bank credit more than long-term credit. Firms responded by cutting their short-term loans for liquidity management purposes and increasing their use of cash and trade credit. In industries where trade credit is more accessible (based on U.S. Compustat firms), we find substitution into accounts payable and little effect on cash and investment. Where trade credit is less available, firms increase cash and cut investment. Thus, trade credit offers a substitute source of liquidity that can insulate some firms from bank liquidity shocks.